ESI Contributions Cannot Be Treated As Ordinary Operational Debt Under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai has held that ESI contributions covered by the statutory trust mechanism cannot be treated as ordinary operational debt merely because the Employees State Insurance Corporation filed its claim as an operational creditor.

“Once the ESI contributions are held to be amounts entrusted for the statutory purpose contemplated under the ESI Act and consequently excluded under Section 36(4)(a)(i), they cannot be treated as an ordinary operational debt merely because the claim has been filed in Form B,” the bench ruled.

The bench comprising Judicial Member Justice N. Seshasayee and Technical Member Jatindranath Swain was hearing ESIC's appeal against the resolution plan of Sri Lakshmi Srinivasa Jute Mills Pvt. Ltd.

ESIC had claimed ₹13.38 crore towards unpaid ESI contributions for 2012 to 2018. The claim was treated under the resolution plan as Government or operational creditor dues, with only 1%, or ₹13.38 lakh, provided for payment.

ESIC argued that the contributions are statutory amounts meant for employees and do not beneficially belong to the corporate debtor. It relied on Section 36(4)(a)(i) of the IBC, which excludes third-party assets held by a corporate debtor, including assets held in trust, from the liquidation estate.

In simple terms, the provision keeps assets that belong to someone else outside the pool available for distribution to creditors. ESIC therefore argued that the contributions could not be distributed under Section 53, which sets out the order for distributing assets forming part of the liquidation estate.

The respondents argued that ESIC had filed its claim in Form B as an operational creditor and could not later seek a different treatment. They also relied on Section 36(4)(a)(iii), which expressly excludes provident fund, pension fund and gratuity fund amounts, arguing that ESI contributions were not mentioned there.

The NCLAT relied on its earlier decision in Nurani Subramanian Suryanarayanan v. Employees State Insurance Corporation, where it held that ESI amounts contributed by employers and employees and lying with the corporate debtor are held in trust and fall within Section 36(4)(a)(i).

The bench noted that this principle was subsequently reaffirmed in Regional Director, ESI Corporation v. Manish Kumar Bhagat.

It noted, “The form prescribed for submission of a claim is procedural in nature and cannot have the effect of converting an amount which is statutorily required to be held for the benefit of the employees into an asset beneficially belonging to the Corporate Debtor.”

The bench rejected the respondents' argument based on Section 36(4)(a)(iii), holding that ESI contributions were not being excluded by analogy with provident fund, pension or gratuity funds. Their exclusion arose independently under Section 36(4)(a)(i), read with Section 40(4) of the ESI Act.

The tribunal held that ESI contributions falling within Section 40(4) of the ESI Act do not form part of the corporate debtor's assets and cannot be subjected to the Section 53 distribution waterfall. The resolution plan therefore could not treat them as ordinary Government or operational creditor dues and provide only a fraction of the claim.

The NCLAT set aside the NCLT order to the extent it approved treatment of the ESI contributions as ordinary Government or operational creditor dues and provided for only 1% payment. It directed the Resolution Professional and successful resolution applicant to give effect to the ruling for contributions covered by Section 40(4) of the ESI Act read with Section 36(4)(a)(i) of the IBC.

The exact amount qualifying for exclusion is to be determined from the statutory records and the relevant contribution period.